Wages Continue to Grow, Good for Workers but a Worry for the Fed

Wage growth remained strong in early 2023 — good news for workers trying to keep up with the rising cost of living, but a likely source of concern for Federal Reserve officials as they try to tamp down inflation without causing a recession.

Wages and salaries for private-sector U.S. workers were up 5.1 percent in March from a year earlier, and up 1.2 percent from December, the Labor Department said Friday. That was the same growth rate as in December, and defied forecasters’ expectations of a modest slowdown. A broader measure of compensation growth, which includes the value of benefits as well as pay, actually accelerated slightly in the first quarter.

The Fed has been raising interest rates for more than a year in an effort to cool off the economy and bring down inflation. Wages are a big piece of that puzzle: Policymakers believe that the labor market, in which there are far more available jobs than workers to fill them, is pushing up pay at an unsustainable rate, contributing to inflation. They are trying to strike a delicate balance, raising borrowing costs enough to discourage hiring and ease pressure on pay, but not so much that companies begin laying off workers en masse.

The results of those efforts have been mixed. Inflation has come down from its highs last year, and economic growth has slowed: Data released Thursday showed that gross domestic product, adjusted for inflation, increased at just a 1.1 percent annual rate in the first quarter. Companies have begun posting fewer job openings, and previously overheated sectors of the economy, like housing and tech, have cooled dramatically.

But inflation has come down more slowly than many forecasters had expected, and many economists say that while the labor market may no longer be boiling over, it is still at an uncomfortably high simmer. The wage figures released Friday tell a similar story: Pay is no longer rising as rapidly as it was in the middle of last year, but it is still rising much faster than before the pandemic.

Fed officials were already expected to raise interest rates again at their meeting next week, and the wage data released Friday erased any remaining doubts, argued Omair Sharif, founder of Inflation Insights.

“If any Fed officials were wavering on a May rate hike,” he wrote in a note to clients, the wage data “will likely push them to support at least one more hike.”

Wage growth is a delicate issue for the Fed. Faster pay gains have helped workers, particularly those at the bottom of the earnings ladder, keep up with rapidly rising prices. And most economists, inside and outside the Fed, say wage growth has not been a dominant cause of the recent bout of high inflation.

But Fed officials worry that if companies need to keep raising pay, they will also need to keep raising prices. That could make it hard for inflation to return to the central bank’s target of 2 percent per year, even as the pandemic-era disruptions that caused the initial pop of inflation recede.

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